Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
New boutique Blackwattle wants to build a better fundie
Blackwattle Investment Partners, which announced its existence on Monday, is an attempt to create a “new generation diversified funds manager” with a model it believes will create better alignment with clients and prevent it from developing the same problems that have frustrated other Australian fundies.
“It really started two years ago, like most of these conversations do, over a beer; we were talking about the industry and identifying where companies do things well as well as all of these inadequacies,” Blackwattle CEO Jarred Rubin told ISN. “That conversation snowballed into where we are today, pulling in some amazing managers, our board, our distribution capability and significant capital backing on our corporate balance sheet and in our portfolios.”
Having poached its portfolio managers from Schroders, Aware Super, and Ellerston and Watermark – and with everybody having taken pay cuts of up to 60 per cent to be there – Blackwattle is trying to “create a funds management business in a better way”, free of the aforementioned “inadequacies” that have plagued big Australian fundies for years – strategies outstripping their capacity, and power, decision making and equity concentrated in the hands of a single person.
“You’ve seen a lot of well-known fund managers come undone due to key man risk, and equity and shareholders both have an adverse outcome,” says CIO Michael Skinner. “We’re all partners in this together and we’re building a business together; there’s no single person at the top.”
Most fund managers don’t have these problems from the start; everybody believes in capacity constraints until they hear the siren song of fee gathering, and key people aren’t born, they’re made. But Skinner believes the steps Blackwattle has already taken will keep the risks low.
“Each of (our portfolio managers) will do well in their own right and we want them to be known as excellent investors in their given equity strategy,” Skinner says. “But because we’re diversified with four portfolios and in time five and six and seven, we feel that there’s not a single person at the top of all the strategies that represents a key risk or key decision maker. We’ve got independent decision making across all our portfolios…We’ll prioritise performance over fee gathering.”
While the flavour of new manager and strategy launches has been trending towards alternatives and private markets since the public ones went haywire in 2022, Skinner says that liquid equities are still the king of wealth creation.
“Asset classes will come and go with fad and fashion and hype, and for different macroeconomic reasons. We think equities are the best way to deliver long-term sustained outperformance for ourselves and our clients; we’re not launching these products for what’s in favour today. These are portfolios we’ll be running for 30 or 40 years if we stick to what we’re good at.
“Our style is firmly quality; we don’t believe in factor allocations of high growth, deep value or momentum. Those strategies do well for a period of time and in certain seasons where we’re firmly focused on quality, That for us means buying the best possible businesses in an industry, run by a trustworthy management team with skin in the game and buying them at the right price below intrinsic value.”
Blackwattle will be launching four strategies from July – small cap quality, mid cap quality, long-short 130/30 quality and large cap quality – with “ambitions” to grow into global equities and alternatives.
Small caps will be managed by Robert Hawkesford and Daniel Broeren, who were previously at Ellerston and Watermark; Tim Riordan and Michael Teran head up mid caps after managing equities at Aware Super; and the long short and large cap funds will be managed by Ray David and Joe Koh, formerly of Schroders.
The partnership is led by Rubin, Skinner, former Pinnacle distribution director Matthew Dell, and head of distribution Maggie Mills, formerly head of investment sales at Zurich. Fifty per cent of the share register is money from the board, executives and portfolio managers, with the balance from family offices, individuals and friends and family.
“We didn’t show it to institutions; we didn’t want to concentrate our register too greatly – it makes the business less diversified and resilient from a shareholder perspective,” Rubin says. “We wanted to put together a collection of really supportive shareholders and they are really supportive. The vast majority of them put seed capital into the portfolios.
“Eighty per cent of our focus is on the intermediary wholesale market; we think it provides a resilient client base. But a number of institutions are interested in our portfolios and we’ll target them now and in the future.”
